Post by
bartno12001 on Aug 08, 2024 7:27am
Tixt
It was downgraded to hold by Td and target price US$3.75
THE TD COWEN INSIGHT We are downgrading given what we believe to be structural changes to the CX market that risk the growth and margin outlook for TIXT. Combined with a second guidance cut in a row, we believe the company will need time to win back investor confidence. Outside a potential acquisition by Telus, which they have expressed they do not intend on doing, we believe the shares could remain range-bound. Impact: NEGATIVE See our previous note for a review of the results. Structural market changes. Our biggest concern with the results is what seems to be a structural change in the market with increased pricing pressure. Customers are becoming increasingly sensitive to price, given the macro environment, and competitors are reducing prices considerably more than in the past to address the changing market dynamic. We believe this sets up a challenging market for TIXT to compete in, particularly given that its strategy had been to get premium pricing for higher quality. We estimate that revenue growth outside its top-3 customers was ~(10%). We believe this market change could persist, especially given the expectation for a long, slow recovery, and brings to question the long-term growth and margin profile of all stakeholders in the industry. The lower growth expectation is not a result of GenAI disrupting the market. The company continues to believe that GenAI will support call centre representatives to drive higher efficiency. Execution challenges. When management started seeing the pricing pressure, they put programs in place to lower their cost to serve. These cost saving initiatives are taking longer to realize the benefits from, but are expected to largely materialize in H2/24. These savings, combined with a stable market outlook, including with its third largest customer, is what gives management confidence in the revised 2024 guidance. Watch the debt covenants. We also note that the lowered EBITDA estimates imply there is risk to the company breaching debt covenants. TIXT needs to stay below 3.75x leverage each quarter in 2024 and 3.25x each quarter in 2025. While we estimate they will stay on side, it could get close when the covenant steps down to 3.25x in Q1. Could TELUS take it private again? Given the significant pull back in share price, it brings to question whether TELUS would acquire the rest of TIXT. TELUS management has said it is not their intention to take it private. However, should they change their mind, we estimate that TIXT shares could be acquired for up to $7.50.
Comment by
bartno12001 on Aug 08, 2024 7:45am
Just note an insider Tobias Dengel, president of willow tree, acquired 100k shares at US$3.42 average. Aug 6 transaction